Chapter 5 Conclusion
- Matthew Gaertner, Laure Redifer, Pedro Conceição, Rafael Portillo, Luis-Felipe Zanna, Jan Gottschalk, Andrew Berg, Ayodele Odusola, Brett House, and José Saúl Lizondo
- Published Date:
- March 2012
This paper analyzes the implications of scaling up aid to Africa in line with the international commitments made at the 2005 G-8 Gleneagles Summit. It reflects the results of 10 pilot studies conducted jointly by the country authorities, the UNDP, and IMF staff using a common framework. From a sectoral perspective, the report assesses what each of the 10 countries might do with aid made available at the levels committed to by the G-8 in 2005. It also explores the macroeconomic implications of scaling up development assistance through what might be expected of growth, inflation, real exchange rate developments, and other macroeconomic indicators.
Both micro- and macroeconomic analyses are necessary and interrelated in making aid effective. The core challenge is to execute productive investments efficiently. If this challenge can be met, the macroeconomic challenges are manageable. However, poor macroeconomic responses can still thwart intended results.
The main conclusions of the paper follow:
- An increase in aid is necessary to meet the Gleneagles commitments. Although aid to SSA has risen in recent years, it remains well below the goals set in 2005.
- Existing development plans are underfunded in the pilot countries, and scaling up development assistance in line with the Gleneagles commitments would go a long way toward closing the gap.
- Existing development plans should be used to shape the spending of increased aid. These plans should integrate public investment programs for the use of additional aid with the following: (i) MDG-based development priorities, which are drawn from the countries’ Poverty Reduction Strategy Papers; and (ii) multiyear budgets, which are based on Medium-Term Expenditure Frameworks. This ensures consistency between existing spending plans, domestic revenue efforts, and nonconcessional borrowing, where available.
- Scaled-up aid will be most efficient if it is well integrated with recipients’ budget and implementation systems. Recipient countries must also emphasize continued improvements in public financial management and complementary mobilization of domestic resources in line with potential, underpinned with results-based monitoring and evaluation systems.
- The sectoral focus of countries’ spending plans is on infrastructure and human development, both of which are critical to meeting the MDGs.
- The macroeconomic analysis suggests that scaling up to meet the Gleneagles commitments can have a substantial positive effect on growth, as long as the projects financed are well implemented, and consequently on track toward achieving the MDGs.
- Macroeconomic management needs to avoid counteracting the benefits of aid while still preserving overall macroeconomic stability. Aid, if sufficiently concessional, allows scaling up while avoiding risks to debt sustainability. Some temporary real exchange rate appreciation—through inflation in a pegged exchange rate regime—and temporary adjustment in the size of tradables versus nontradables sectors can be expected. The duration of this adjustment varies, but in some cases could be years.
- Over the longer term, the extent to which growth is enhanced depends critically on the volume, efficiency, and effectiveness of public investment. If the tradables sector is an especially strong driver of productivity growth, the stakes are higher for the effective use of aid. If aid helps build public capital and raises productivity in the tradables sector, aid can produce even greater gains for overall growth, causing Dutch vigor. If aid is wasted, however, the diversion of scarce resources from the tradables sector could reduce productivity growth over time, causing Dutch disease. The key is to use aid well, and if necessary, devote it to investment, such as in ports, roads, and electric power to promote productivity, including in the tradables sector.